FHFA: No Principal Forgiveness for You!

July 31, 2012 1 Comment »
FHFA: No Principal Forgiveness for You!

The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, concluded today that principal forgiveness is not the best approach to help homeowners and reduce foreclosures.

Over the past several months, there had been a lot of back and forth about whether principal reductions would prevent more strategic defaults and otherwise unnecessary foreclosures, but it now appears to be dead in the water.

FHFA director Edward J. DeMarco, who had earlier expressed little interest in reducing principal for underwater homeowners, released a statement today advising that it wouldn’t be in the best interest of taxpayers, who are ultimately responsible for footing Fannie and Freddie’s bill.

HAMP PRA = FAIL

The agency concluded that an initiative called, “Home Affordable Modification Program Principal Reduction Alternative,” or HAMP PRA for slightly shorter, didn’t “clearly improve foreclosure avoidance while reducing costs to taxpayers,” as compared to other existing approaches.

In other words, the programs already in existence, such as HARP 2.0, are plenty good to encourage homeowners to stay in their homes and make their mortgage payments.

Anything more is just too expensive, and could actually cause more harm to the housing market and the mortgage industry.

Mortgage Bankers Association (MBA) president David H. Stevens also released a statement, showing his support for DeMarco while focusing on the availability of credit going forward.

Stevens noted that principal forbearance is effective as well, without the negative ramifications of making mortgage financing more restrictive and expensive for everyone else in the future.

A Blow for Hopeful Homeowners

All in all, it’s a big blow for hopeful homeowners, but given the fact that many have probably already taken advantage of HAMP or HARP, it may have been a case of too little, too late.

Additionally, many individual banks and mortgage lenders offer principal reductions to their borrowers, so it’s still possible to get your hands on some free home equity!

I argued a while back that principal reductions on loan modifications weren’t the best move, largely because of the enormous cost and the fact that sizable mortgage rate reductions should solve the affordability issue.

There’s also the matter of homeowners re-defaulting, even after receiving a principal reduction and a lower mortgage rate. Yes, sometimes everything isn’t enough.

Sure, it’d be nice to have the bank reduce your outstanding loan amount and put you above water, but what about the homeowners who didn’t serially refinance. Or those who made 15-year fixed payments instead of relying on interest-only loans and option arms?

It just gets to a point where it would create a huge divide between the so-called “responsible homeowners” and the overextended borrowers in the “sand states.”

Of course, if DeMarco ran the numbers and did the math, it may just come down to a simple numbers game, and less of a political issue. But it’s political any way you slice it.

It has already created a sh*tstorm on the web, with most losing their minds over the fact that DeMarco has denied everyday Americans in favor of banks and faceless corporations, especially since the numbers indicate that principal reductions would actually save taxpayers money.

In fact, most are calling for him to be fired immediately. Yikes.

Personally, I think a more important initiative that still hasn’t been addressed is a mass loan modification program for private-label mortgages, those not backed by Fannie, Freddie, or the FHA. Where is their help?

These homeowners are in dire need of loan modifications as well, and would probably be thrilled with something as simple as a mortgage rate reduction.

And guess what? Last week, Oregon senator Jeff Merkley floated a decent looking plan to carry out such an effort.

One Comment

  1. Cauthon August 11, 2012 at 11:46 pm -

    Why would a lender refuse to reduce the principal for the current homeowner, then foreclose and sell the house for much less?

    Could it be that part of the problem is that the ownership of the loans has been separated from servicing of the loans? Perhaps the compensation package for the servicing organization rewards behavior that is not in the best interest of the owners of the loans?

    And does that happen because the people who wrote the paperwork for bundling of mortgages and sale of mortgage backed bonds did not anticipate large scale default by borrowers, and failed to make the best provisions that could have been made to get through the times of the troubles?

Leave A Response